How The Wrong Pricing Approach Is Killing Your Business

By Mike Figliuolo

Bob Barker used to point out when the price was right, but what happens to your business when the price is wrong? Getting pricing wrong is one of the biggest and costliest mistakes you can make, and that applies whether you’re a sole proprietor or the head of a Fortune 500 company.

First, a little pricing math. Let’s say you sell a widget for $100 and your gross profit on said widget is $30. After taking out overhead, you’re down to $10. Then the tax man comes along and takes four dollars of that, leaving you with a whopping six bucks on your $100 sale.

Here’s the critical part — imagine you want to win a new customer over with a teensy weensy little one-dollar discount. Sure, it’s a one percent discount to him, but you just blew a 10 percent hole in your overall profitability (changing pricing doesn’t change your cost of goods or your overhead and, after tax effects, the majority of that price decrease hits your bottom line like a sledgehammer).

Conversely, if you’re in a position where you can increase pricing by a dollar, you’ve just increased your profit by ten percent (and in this economy, that’s huge). Pricing matters. Big time.

The mistake we often make is in thinking it’s only a one percent price change. You have to look at it from a profitability standpoint. Knowing how hard it is to keep your pricing intact, here are two thoughts on how to get the pricing right regardless of the business you’re in: Sell Value, NOT Price.

It’s very tempting to use price as a selling point. “We’re cheaper than they are” resonates with customers and prospects but, per the above example, you’re probably doing more harm than good with this approach. Only a company like a WalMart with a truly differentiated competitive advantage because of cost structure can pull off a strategy like this.

Instead, you should be selling on value. The price customers pay for your product or service is an investment. Speak to them about the return they get on that investment. In my business, we charge for training. What we’re selling, though, is more efficient people and business processes. If our training helps people reduce meetings, junk analyses, and other such tomfoolery and saves them 12 hours per year per person in productive time, the value we’re creating for our clients is tremendous as compared to the investment they’re making.

Take a moment and articulate the value you’re creating for your customers. Try to quantify it. Show them how your solution makes them more profitable. If you can do that, the conversation isn’t about price — it’s about returns on investment. That conversation enables you to price appropriately and not blow holes in your profitability.

Maintain Pricing Integrity

It’s very tempting to cut prices “just this one time” to win that new customer or keep that important account. The problem with this approach (beyond the financial destruction you’ve wrought as I’ve described above) is you’ve signaled to the market that you’re willing to take less for your product or service.

What happens when another person at your customer hears you cut prices for a different group? They want the same discounted price, right? Or when they hear their competitor is getting a better deal? They want a discounted price. See where this is going?

Cutting pricing is a slippery slope. Do everything you can to be consistent in your pricing across divisions per customer and across multiple customers. If you have to make concessions, don’t do so on the price per item — instead consider volume rebates or one-time “good customer” rebates rather than messing with the price per item. When you take that approach, your widget still costs $100 in the market and you’ve held the pricing line.

Pricing makes a huge difference. By focusing on value and doing what you can to maintain your pricing integrity, you’ll likely have much healthier profitability than if you run around competing on price and having a sale every other week.

How are you thinking about pricing? How are you maintaining or increasing your profitability in today’s business environment?

Mike Figliuolo is the author of “One Piece of Paper: The Simple Approach to Powerful, Personal Leadership.” He’s the managing director of thoughtLEADERS, LLC — a leadership development firm. An honor graduate from West Point, he served in the U.S. Army as a combat arms officer. Before founding his own company, he was an assistant professor at Duke University, a consultant at McKinsey & Co., and an executive at Capital One and Scotts Miracle-Gro. He regularly writes about leadership on the thoughtLEADERS Blog, read the full original post here.
Originally published: Dec 1, 2011

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